Afghan media is reporting multiple casualties in the attack.
There was no immediate claim of responsibility for the latest attack in the Afghan capital that followed a series of security warnings in recent days to avoid hotels and other locations frequented by foreigners.
"Four attackers are inside the building," an official at the National Directorate of Security (NDS) spy agency said.
They are "shooting at guests", he said.
A guest hiding in a room said he could hear gunfire inside the 1960s hilltop hotel where dozens of people attending an information technology conference on Sunday were staying.
"I don't know if the attackers are inside the hotel but I can hear gunfire from somewhere near the first floor," the man, who did not want to be named, said by telephone.
"We are hiding in our rooms. I beg the security forces to rescue us as soon as possible before they reach and kill us."
An official said the attackers were armed with small weapons and rocket-propelled grenades when they blasted their way into the hotel, which often hosts weddings, conferences and political gatherings.
"Seven wounded people have been taken to hospital," interior ministry deputy spokesman Nasrat Rahimi said, adding that two attackers have been killed.
"Some other guests have been rescued. We will be able to release casualty figures once the operation ends."
Rahimi said the first and second floors of the hotel have been secured by security forces, who are now trying to clear the fourth and fifth floors.
Special forces were being lowered by helicopters onto the rooftop of the hotel, he added.
The fourth floor of the hotel, which boasts several restaurants and an outdoor swimming pool, had been set on fire during the raid, the NDS official said.
"The operation will soon end and the attackers will be killed," interior ministry spokesman Najib Danish said.
Authorities are already investigating how the attackers got past security which was taken over by a private company two weeks ago, Danish said.
"They probably used a back door in the kitchen to enter," he said.
Abdullah Sabet, an official at the communications and information technology ministry, said IT officials from around the country were staying at the hotel ahead of a conference on Sunday.
"There were 40 of them in the hotel. We don't know if any of them have been killed or wounded," Sabet said.
Security at the Intercontinental, which is not part of the global InterContinental chain, is relatively lax compared with other high-end hotels in Kabul.
A conference on Afghanistan-China relations was held in one of its function rooms earlier Saturday, attended by the Chinese embassy's political counsellor Zhang Zhixin.
An AFP reporter who attended the conference passed through two vehicle security checkpoints. At the entrance to the building there was a physical inspection that could be easily evaded by scaling a low-level barrier and entering the lobby.
Security alerts sent in recent days to foreigners living in Kabul warned that "extremist groups may be planning an attack against hotels in Kabul" as well as public gatherings and other locations "where foreigners are known to congregate".
The Intercontinental was last targeted in June 2011 when a suicide attack claimed by the Taliban killed 21 people, including 10 civilians.
Security in Kabul has been tightened since May 31 when a massive truck bomb ripped through the diplomatic quarter, killing some 150 people and wounding around 400 others - mostly civilians. No group has yet claimed that attack.
The Islamic State group has claimed most of the recent attacks in the Afghan capital, but authorities suspect that the Taliban-affiliated Haqqani Network has been involved in some of them.
The deadliest of the recent attacks happened at a Shiite cultural centre on December 29 when a suicide bomber blew himself up, killing more than 40 people.